The landscape for the workhorse of many retirees' income could see a dramatic shift in the near future

Actuary Dan Morrison, pension-plan retirement specialist with Towers Watson in Calgary, says retirement income is 'like sailing a ship across the ocean.'

Besides the obvious benefit of having a job -- money in exchange for services provided -- one of the most coveted other forms of compensation is a pension plan. The idea employers and employees jointly contribute to the retirement stew pot is an enticing carrot, often a deciding factor for highly skilled and sought-after workers.

Still, many Canadians are not part of any work pension plan -- outside of the ubiquitous Canada Pension Plan. Only about four in 10 workers today are members of plans through their employers. Even though they're likely better off than those who don't have any work pension plan at all, their retirement picture isn't without a few stormy clouds on the horizon.

Canada's pension system may not be in shambles like those of other nations, but it's not in superb health, either. Conditions such as increased market volatility, low interest rates and fewer workers paying into plans with more pensioners earning benefits make for a difficult environment.

A survey by Investors Group earlier this year found more than half of Canadian workers don't know what their pension benefit will be, even though more than a third will rely on it as their primary source of income -- indicating many people working today may face some tough choices when they retire.

Even defined-benefit plans (DBs) -- the gold standard of retirement and still the most common pension for many workers today -- are facing challenges. This type of plan, where members know their pension benefit when they retire (a monthly payment for example), is quickly becoming an endangered species in the private sector, says Bradley Hicks, managing director with MFS Investment Management Canada, which manages money for some of Canada's largest pensions.

"We've gone from where the plan sponsor takes on onus for the retirement promise -- to pay out a benefit based on a formula -- to in the last five to 10 years where many plan sponsors on the corporate side have shifted toward a model where employees contribute and employers match, but that's where the employers' responsibility stops."

This shift in the corporate world from defined-benefit plans to defined-contribution (DC) plans solves a financial problem for employers, but creates one for employees.

Retirement income becomes much less certain, says Dan Morrison, an actuary and pension-plan retirement specialist with Towers Watson in Calgary.

"It's like sailing a ship across the ocean," he says. "With a DC plan, we've given that responsibility to the employee to keep checking, and if it's not going to get you to where you want to be, you've got to adjust. So what do you adjust?"

Plan members might have to delay retirement, dampen their retirement spending plans or increase their personal savings.

Yet, while many companies offering defined-benefit plans are now considering or have already implemented defined-contribution plans, most public-sector workers still enjoy defined benefit plans.

Even those, however, are facing challenges. A 2013 report by the Canadian Federation of Independent Business estimates public-sector pensions in Canada could collectively have unfunded liabilities in excess of $300 billion.

It's a problem that's not unique to Canada, either. Defined-benefit pension plans in the public sector are facing uncertain futures around the world. Some nations, such as the Netherlands, and certain U.S. states and municipalities have, in recent years, taken steps to deal with their financing problems, including converting DB plans into a relatively new type of pension called a shared-risk plan with a target benefit.

Here in Canada, this type of plan is catching on. New Brunswick was the first province to allow struggling public pensions to have target benefits that can be adjusted depending on the assets available to cover liabilities, Morrison says.

And according to a recent report by the C.D. Howe Institute, both the federal and provincial governments should make the necessary legislative changes to allow for pension plans to share risk between employers and employees using target benefits.

"I look at target-benefit plans as sort of in the middle between defined-benefit and defined-contribution plans, because they have some defined benefit attributes like pooled risk for investments and longevity, as well as a targeted, defined benefit at retirement," says one of the report's authors, Jana Steele, a lawyer with Osler in Toronto.

"The difference from a defined-benefit plan is you can adjust a target-benefit plan, so if there's not enough money in the plan, you can reduce the pension benefit."

Target-benefit plans are also similar to defined contribution plans because they have cost-certainty for employers. They know how much they will have to contribute to the plans as opposed to defined benefit plans, where they would largely be on the hook for covering deficits. Yet, despite requiring legislative changes allowing for the formation of shared risk plans with target benefits, this type of plan isn't all that revolutionary, Morrison says.

For decades, many trades have already had multi-employer pension plans, where the contributions do not change, but the benefit can change depending on assets available to provide the benefits.

Morrison adds new legislation wouldn't dramatically shift the pension landscape, either. Adding the option of targeted benefits would simply add one more tool for stakeholders to ensure pensions remain viable as the population ages, creating a scenario where fewer workers are paying to support a growing number of retirees.

"The shared-risk or the target-benefit plan gives you one other risk management option, which is to change the amount of benefit pensioners will receive," he says, adding most DB plans can already increase member contributions, push back retirement dates and adjust cost-of-living increases.

And although a shared-risk plan with a target benefit is a likely compromise remedy for troubled public sector plans, Morrison says it's less likely private-sector plans would choose this path, especially if they already offer a defined contribution plan.

"I would be very surprised if any employer who has already moved to a DC plan would say 'This target-benefit concept is better for us' because a shared-risk plan would involve more costs."

Shared-risk plans are not the cure-all for the problems faced by pensions, says actuary Karen Hall, with Aon Hewitt in Vancouver. Nor will they entirely replace defined-benefit pensions.

But changing legislation to allow for shared-risk plans with target benefits certainly can't hurt the situation.

"What people really need is help figuring out their pensions, and a target-benefit plan from that point of view is more transparent than defined-benefit or defined-contribution plans," she says.

"So adding it to the pension landscape is only going to make things better."

Quick facts

-- Public pension liabilities: A report by the Canadian Federation of Independent Business, an organization often critical of how public-sector dollars are spent, found disclosure for public-sector pension plans is not very transparent, and that based on its best estimate, the collective deficit for public pensions could exceed $300 billion -- or $9,000 for every Canadian. Yet, many labour groups have disputed these numbers, arguing the recent surge in the stock market has reduced the deficits for many pension plans.

-- The state of private-sector DBs: Another report released by credit ratings agency DBRS found many of Canada's private-sector defined benefit pensions have funding deficits, too. The 2013 report found firms such as Air Canada, Ontario Power Generation, BCE and Imperial Oil had deficits well more than $1 billion. Some firms, however, had plans that were in good shape, such as Husky Energy, Shoppers Drug Mart and Agrium.

Tips to making the most of your work pension plan

1. First and foremost, be informed about your plan. Know what type of plan it is -- defined benefit or defined contribution -- and how that will impact your retirement, for better or worse.

2. Join the plan as early as you can. Pension plans of all kinds involve costs for employees. That means a smaller paycheque while working, but the long-term benefits of a pension plan outweigh the reduction in take-home pay.

3. Consider pension buybacks. Members of defined benefit plans who have taken time off for maternity or other reasons often have the ability to increase their contributions to ramp up their pension benefit despite have missed a few years of contributions. While the option isn't for everybody, it's worth considering.

4. Get some help. Financial planners can often help round out the big picture for pension plan members. While work pensions make up a big part of the retirement plan financially, along with government benefits such as OAS and CPP, most Canadians still need to save on their own to ensure they will have enough. Furthermore, like RRSPs, pension income is fully taxable, so many retirees with multiple sources of income will need tax advice to build a retirement income that is tax efficient to preserve wealth as much as possible.

5. Choose a target-date plan when possible: This applies to workers who are members of a defined- contribution plan, who face the challenge of ensuring their money in the plan is properly set up to provide as big a pension payment as possible at retirement. Target-date plans allow members to pick a risk profile for their pension investments that corresponds to their expected retirement date, so as the worker gets closer to retirement, the investments automatically become more conservative.

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